Cost – basedCompetition – basedMarket - led Cost-plusPrice leadershipPenetration Marginal costPredatory pricingSkimming Contribution costGoing ratePrice discrimination Full cost (absorption cost) Loss leader Psychological pricing Promotional pricing

COST-BASED

 Cost-plus pricing refers to adding a percentage to the original price of the product to make more profit.  Simple and easy to calculate  Example: firm buys product from wholesaler for $40, and adds a 50% markup to the product (selling it for $60). Firm makes a profit of $20.

 Calculates the cost of supplying an extra unit of output in order to determine a suitable price.  Fixed costs, do not change as output level changes (fixed and indirect costs are excludable).  Similar to cost-plus pricing (except it’s pricing method involves looking at the contribution made from the sale of each product).  E.g. selling price = $8 direct costs = $3 per unit

 Contribution pricing is fixing prices based on the variable costs of producing a good or service in order to make a contribution towards fixed costs and products.  Contribution pricing is widely used by:  - multi-product firms that would find it almost impossible to allocate fixed costs accurately between different products,  - firms that want to attract new orders from potentially important customers, and/or  - companies that want to sell off stock to make way for new inventors.

A price set by calculating the unit cost for a product (fixed and variable costs) and then adding a fixed profit mark-up. Often used by firms making a single type of product. For multi- product firms, full cost pricing needs to be allocated to each product (including fixed costs and full cost calculation). Fixed price + (units of products x variable cost) = Total cost of product Cost per unit = total cost of product / units of products The cost per unit is the least value the business should charge customers for their product(s). The firm will need to add a mark- up to this to make a profit.

COMPETITION- BASED

 Price leadership is a strategy which is mostly used by the best selling products or brands. In this case there are very few substitute products from the customer’s point of view. Dominating firms can set their own prices. The competitors of the dominating firm then follow them and set their prices based on the prices set by the price leader aka market leader.

 Predatory or destroyer pricing is a strategy used by industries to try and force other industries out of the market.  New firms that enter the market keep undercutting other competitors prices in order to force competitors out of the market.  Current firms can get rid of new competitors by temporarily dropping prices. By doing this they later have an increased dominant position, allowing them to increase prices even further than the original.

 Predatory pricing can most of the time benefit customers for a limited period of time in which it takes place.  In some countries this is illegal (U.S EU) because it can lead to new firms kicking out strong based older firms and it will be considered unfair.  A similar strategy is called the limit pricing strategy because they drop prices just enough to kick out the opposition.

 The term “going rate” refers to the average price set by the competitors in the industry.  Going rate pricing is a method of pricing were a firm charges a similar prices to that of competitors for their goods and services.

MARKET-LED

Penetration pricing is a strategy that is used by firms when introducing or establishing a new product in the industry. It involves setting relatively low prices in order to gain market share and for the product to gain brand awareness. As the product begins to establish itself, the organization can raise the price. This kind of strategy is suitable for mass market products. It is also suitable for new businesses that are trying to enter a well established market. It is highly suitable for products that have a high price elasticity of demand, where lowering the prices will lead to a higher sales volume.

 Skimming refers to setting a high price on a new product. This is usually because the business has a unique product.  The aim of this strategy is to take advantage of having no other similar products in the market

Occurs when the same product or service is sold in different markets at different prices. Perfectly legal Product – essentially same, prices – different Also called – variable pricing Commonly seen during ‘peak periods’ – increased demand, firms know - low PED Three conditions to be met for successful price determination: Firm should be monopolistic – price-setting powers Customers should have different PED’s. Separate market so there is no resale. Eg: Airline ticket Different for adults / children Legal to charge different prices/ Same product, different prices – business class / first class. High prices during peak periods. Separate market because resale is not possible.

 Loss leader pricing is a strategy used by selling products at its cost value or below.  This can be considered as a short term strategy that aims to make prices really low to attract customers into the store and also buy more profitable products at the same time.  As it is hard for customers when entering a shop to buy only one product, supermarkets and large shops tend to use this all the time.

 They make a profit by a smart way, they sell the main product at a low price (usually at production cost or lower), and then sell its supplements (what you need to buy to use the product), at a higher price.  An example is like PlayStation 3, the gaming console itself costs around $600 to produce, they sell it at $300-$500, and then sell CD’s and joysticks at high prices like $70, because they have to buy these sub products to use the main product.

Strategy that incvolves using prices - $9.99 / $14.99 Make prices seem lower than $10 / $15 Make customers feel like they are getting a bargain / better price for product Widely used method Works for almost any product Works well when products sold in large quantities Does not work well with taxi services – unsuitable for customers or providers to pay in $0.99

 Often used when marketing new products by charging a low price to attract customers to try the product and to build brand awareness.  Used to gain market share or sell off extra/excess stock e.g. (buy one, get one free)  Usually operates in a limited period just to boost sales during times where there is low demand (or maybe to support the opening of a new store).  Very similar to discount pricing (both attempt to raise market share by lowering prices).